Investing, economics, finance and random thoughts.
Archive for November, 2009
Tax Loss Harvesting
Nov 24th
Seems I raised a few questions from my previous post where I mentioned tax loss harvesting. This information only applies to taxable investors. Tax-deferred investors can ignore this post.
You can also read about tax loss harvesting here:
http://www.bogleheads.org/wiki/Tax_Loss_Harvesting
The basic idea is you sell off your losing asset to capture the losses and apply those losses against other gains and your annual income. You then buy back into the asset in a couple various ways to build your position back again to where it should be. This allows you to bank those losses as a credit that can lower your tax bill. It is easier than it sounds and can save you big bucks. If you have losses in your taxable investments and don’t understand this, talk to a CPA. It may pay for itself many times over.
Usually you can’t do much tax loss harvesting after the first few years because most assets will have developed too much in gains so there are no losses. But with the markets so volatile the last year or so this option has become more available to investors. You can use tax loss harvesting with stocks, bonds, gold and other assets that show a loss (check with your CPA for your situation). The IRS requires you to wait 31 days before buying the same asset again to avoid a “wash sale” (which would negate the ability to write off the losses) but this is easy to work around.
The Home Stretch…
Nov 23rd
In January of last year I asked what people thought would perform the best of the four Permanent Portfolio Assets (Stocks, Bonds, Cash or Gold). While I tossed my hat into the stocks camp (which have recovered sharply since last year), the gold bulls seem to be winning. Here’s the breakdown according to Morningstar using a standard ETF version of the Permanent Portfolio for ease of performance tracking:
SPDR Gold Shares (Ticker: GLD): +30.54
Vanguard Total Stock Market (Ticker: VTI): +25.44%
iShares Short Treasury Bond Fund (Ticker: SHV): +0.20%
iShares Barclays 20+ Year Long Term Treasury Bond Fund (Ticker: TLT): -17.76%
YTD Morningstar Total Returns (capital gains, interest and dividends): +13.21%
Gold has been able to beat stocks so far this year. I was pretty sure that stocks would rebound strongly but didn’t expect gold to still do so well. We still have a month to go, but looks like the gold bulls may be buying the champagne come New Year’s Eve.
Long term bonds took a beating so far, but usually it is the case that one or more assets in the portfolio may be doing poorly while one or more may be doing well. Normally what happens are the gains from the winners can offset the losses from the loser. Not always, but mostly. So even though LT bonds are down almost 20%, the stocks and gold have provided more than enough power to grow the portfolio in total. And of course that’s what really matters. Don’t look at assets in isolation, look at how they work together in the total portfolio value.
Right now is also a good time to remind taxable investors to start planning for end of year rebalancing sales to capture losses (such as the Long Term Bonds), to take gains to offset against losses, etc. If this is confusing to you, talk to an accountant for some advice as smart tax loss harvesting can significantly reduce your tax bill.
Happy Thanksgiving…
ISM is Here to Save Us!
Nov 20th
The stench of socialism continues to spread. The incompetent boobs in power that turn everything they touch into lead are ready to screw up health care for everyone. Yet, people eat up their bullshit like it was a hot fudge sundae.
You think no-fly lists are bad? Wait until you end up on the no-healthcare list for pissing off the wrong people. Or perhaps having your private medical conditions used as political weapons. The possibilities for bureaucratic monkey business are limitless (along with the costs of these programs).
It’s funny that people call this garbage “progressive” when it’s the same old tyrannical nonsense that has existed throughout human history and always ends up a disaster. I found this little 1948 film over at The Conpiracy to Keep You Poor and Stupid that sums up the situation nicely:
Too much gold hype…
Nov 10th
If you want some no-nonsense ways to own Gold you can read my FAQ:
People are wondering about the gold price. Is it going to go higher? Is it going to go lower? Etc. Well the unexciting answer is nobody knows. That’s right, nobody at all knows. I don’t care how pretty their charts are or what logical arguments they have for or against. What I do know is that too many people are talking about the stuff.
If you own gold as part of your Permanent Portfolio allocation then you should stick to your plan and rebalance when it is needed. However, I would not go out and buy gold for my speculative Variable Portfolio bets right now.
I don’t think any particular asset class looks like a great buy for a Variable Portfolio speculation. So personally I’d just stick to the four way Permanent Portfolio split and not do much gambling with my money.
Now if you own gold in your Permanent Portfolio again I’d say to stick to the plan. That means you have a rebalancing band of either a low of 15% and high of 35% or a low of 20% and high of 30%, etc. If you are at or above your band then you should sell down your gold and rebalance the proceeds into your lagging assets.
Yes, I know it’s hard when you read all the doom and gloom but you have to do it. The point is you take an asset everyone wants and sell it to buy something that less people want.
The Permanent Portfolio is designed to limit risks and perform contrary buys and sells in the market. At any one time you probably are going to have an asset doing very poorly and another doing very well. This is how it is designed to work. But you need to be sure you do your part. That means selling down assets when they are doing great and using the money to buy the things people don’t want to touch at the time.
You hear that term “Bubble” being overused a lot now? “Gold Bubble”, “Stock Bubble”, “Bond Bubble”, “Bubble Bubble”. Well the way you limit losses due to “bubbles” is by rebalancing. No elaborate market timing is needed. If you own too much, you sell it down until you own less of it and buy something else. Simple stuff.
Are you nervous about the rise in gold prices and all the hype? Well I know some people are because I’ve heard about it. Here’s my advice:
If you have a rebalancing band that is 35% and your gold has risen to, for example, 33% of your allocation then perhaps you can sell it down early to 25% and re-deploy the money. I don’t think selling early in your rebalancing bands is going to hurt you much if it makes you sleep better at night. Perhaps in the future you make your rebalancing bands the 20%/30% thresholds so you keep a tighter control over how much money you have at risk in each asset. This can incur added tax and brokerage fees you need to be aware of, but it’s not terrible if it makes you feel comfortable. Remember, this isn’t a science so there are no precise answers to be had.
The one thing I would not do though is let any allocation slice rise above 35%. If you sell out too early and harvest those profits you will be OK. Sure you’ve not milked out the very top of something. But, as they say, only liars sell out at the very top and buy at the very bottom. But if you wait and let an allocation go to 40%, 45%, 50%, etc. you can set yourself up to take a tremendous loss if the markets turn suddenly. This isn’t just a warning for gold, it’s a warning for any asset class you hold.
This is just a reminder to not make gold a religion and use it intelligently in a portfolio. I don’t know what the gold price is going to do, but I don’t think you should listen to all the hype in the news about it either. Stick to your plan and don’t take risks with money you can’t afford to lose.